A cash flow statement illustrates a portion of your business’s finances by focusing specifically on the flow of cash into and out of your business. It provides an understanding of how your business operates and gives a sense of your business’s financial health. A cash flow statement is one of the key financial statements lenders use when reviewing your business’s eligibility for loans.
Why Are Cash Flow Statements Important?
A cash flow statement demonstrates how effectively your business manages cash and how much cash you have available to cover business debts and other expenses. The statement provides a detailed record of how successful your business is in generating cash and how that cash is spent. Small business lenders use cash flow statements to assess the value of your business and influence their investment decisions.
For business owners and company managers, preparing and reviewing these statements, and noting changes, gives important insight into the business. Over time, financial statements show patterns and opportunities for improvement in simple black and white.
What Information is shown on a Cash Flow Statement?
As the name suggests, a cash flow statement shows how cash came into and left your business during a specific timeframe. It begins with your business’s cash balance at the beginning of the reporting period. Then, it details how cash entered and left your business through the following categories:
- Operating activities: Any cash generated or used through your business’s standard activities (i.e. customer transactions, income tax payments, employee salary payments, supplier payments, etc.)
- Investing activities: Any cash generated or used through your company’s investments (i.e. asset purchases, loans to vendors, etc.)
- Financing activities: Any cash generated or used through interactions with lenders, investors, or shareholders (i.e. loans, debt repayments, etc.)
After the cash flow from all of these activities is calculated, the statement concludes with your business’s cash balance at the end of the reporting period.
When making decisions about investing, lenders will check for consistent positive cash flow within your business. Negative cash flow might indicate that there is not enough cash available in your business to make loan repayments.
Statement Timeframes
Year-end (YE) statement: Covers a whole fiscal or calendar year
Interim statement: Covers a shorter period of time, typically a month or a quarter
Since changes in cash flow occur regularly, it’s important to create cash flow statements on a frequent basis. Preparing monthly cash flow statements can help you better keep track of the cash coming into and out of your business.
Common Mistakes to Avoid on Cash Flow Statements
- The wrong date in the wrong place. The dates on this statement are very important and are often not entered correctly when they’re not prepared by a finance professional. The statement has to show the time period the statement refers to, whether it’s year-end or interim, and it also must include the date when the statement was prepared.
- Misclassifying the categories of activities. As explained above, all cash flow is categorized as an operating, investing, or financing activity. Be sure to check that each cash flow activity noted in the statement is listed under the correct category.
- Inconsistent accounting – cash versus accrual. Accounting documents show your income and expenses either on a cash basis (money received/paid) or on an accrual basis (money invoiced/owed, but not necessarily paid yet). These documents include your tax returns! It’s important to make sure all your financial documents use one or the other consistently, and triple check your tax returns to make sure they match.
Preparing a cash flow statement correctly avoids questions and revisions that can slow down the process when applying for a small business loan or purchasing commercial real estate. If you are not confident in your ability to prepare and update your cash flow statement, consider hiring an accountant or CPA to put your business’s best foot forward.